Anyone not alarmed by the state of the U.S. economy is not paying attention. As our Dear Leader begins his term, the theory of very big government has the support of an alarmingly broad political consensus. Despite the obvious dangers—devastating inflation and the ruin of the dollar—the United States seems pledged to a debt-funded spending spree of gargantuan proportions.

In opposing this trend, critics face the problem that the perils to which they point sound very theoretical and abstract. Perhaps Zimbabwe prints its currency in multi-trillion units, but that’s a singularly backward African dictatorship: the situation has nothing to do with us. Yet an example closer to home might be more instructive. Unlike Zimbabwe, this story involves a flourishing Western country with a large middle class that nevertheless managed to spend its way into banana-republic status by means very similar to those now being proposed in Washington.

The country in question is Argentina, and even mentioning the name might initially make any comparison seem tenuous. The United States is a superpower with a huge economy. Argentina is a political and economic joke, a global weakling legendary for endemic economic crises. Between them and us, surely, a great gulf is fixed. Yet Argentina did not always have its present meager status, nor did its poverty result from some inherent Latin American affinity for crisis and corruption. A century ago, Argentina was one of the world’s emerging powers, seemingly destined to outpace all but the greatest imperial states. Today it is … Argentina. A national decline on that scale did not just happen: it was the result of decades of struggle and systematic endeavor, led by the nation’s elite. As the nation’s greatest writer, Jorge Luis Borges, once remarked, only generations of statesmanship could have prevented Argentina from becoming a world power.

For Americans, the Argentine experience offers multiple warnings, not just about how dreadfully things can go wrong but how a nation can reach a point of no return. Not only did Argentina squander its many blessings, it created a situation from which the society could never recover. Argentines still suffer from the blunders and hubris of their grandparents without any serious likelihood that even their most strenuous efforts will make a difference. A nation can get into such a situation easily enough, but getting out is a different matter. A corrupted economy can’t be cured without being wiped out and started over.

It is hard, looking at the basket case Argentina has become, to imagine what an economic powerhouse the country was before World War II. From the 1880s, Argentina was, alongside the U.S. itself, a prime destination for European migrants. Buenos Aires was one of the world’s largest metropolitan areas, in a select club that included London, Paris, Berlin, and New York City. Argentina benefited mightily from foreign investment, which it used wisely to create a strong infrastructure and an excellent system of free mass education. It had the largest and most prosperous middle class in Latin America. When World War I began, Argentina was the world’s tenth wealthiest nation.

Right up to the 1940s, American and European economists struggled to explain the glaring contrast between booming Argentina and slothful Australia. As many studies pointed out, both countries had begun at a roughly similar point, as agricultural producers dependent on fickle world markets. Yet Australia remained stuck in colonial status while Argentina made the great leap forward to the status of an advanced nation with an expanding industrial base and sophisticated commerce.

So what happened? Certainly the country was hit hard by the depression of the 1930s, but so were other advanced nations that ultimately recovered, and Argentina profited from intense wartime demand for primary products.

The country was killed by political decisions, and the primary culprit was Juan Perón. He dominated political life through the 1940s and ruled officially as president from 1946 to 1955, returning briefly in the 1970s. Although he did not begin the process, he completed the transformation of Argentine government so that the state became both an object of plunder and an instrument for plunder.

Perón came from a fascist and corporatist mindset, which became more aggressively populist under the influence of his second wife Eva. They aimed their rhetoric against the nation’s rich, a designation that was swiftly expanded to cover most of the propertied middle classes, who became an enemy to be defeated and humiliated. To equalize the supposed struggle between the rich and the dispossessed, the Peróns exalted the liberating role of the state. The bureaucracy swelled alarmingly as nationalization brought key sectors of the economy under official control. Government bought loyalty through a massive program of social spending while fostering the growth of labor unions, which became intimate allies of the governing party. Argentina came to be the most unionized nation in Latin America. Perón also ended any pretense of the independence of the judiciary, purging and intimidating judges about whom he had any doubts and replacing them with minions.

The Peronist model—a New Deal on steroids—evolved into an effective clientelism, in which party overlords and labor bosses ruled through a mixture of corruption and violence. Clientelism, in effect, means the annexation of state resources for the benefit of political parties and private networks. Right now, both the word and the concept are not terribly familiar to Americans, but this is one Latin American export that they may soon need to get used to.

As high taxes and economic mismanagement took their toll, the Peróns blamed the disasters on class enemies at home and imperialism abroad, but the regime could not survive the loss of the venerated Eva. After attempting briefly to swing back to the center, Juan Perón was overthrown and driven into Spanish exile. Later governments tried varying strategies to reclaim Argentina’s lost splendors and some enjoyed success, but Perón’s curse endured. Even when his party was driven underground, its traditions remained: demagogic populism, a perception of the state as a device for enriching supporters and punishing foes, and a contempt for economic realities. Utopian mass movements inspired by Peronist ideas and charisma segued easily into the far-left upsurge of the 1960s, when Argentina gave birth to some of the world’s most dangerous terrorist and guerrilla movements. By 1976, the military intervened to stave off the imminent collapse of the state and launched the notorious Dirty War that killed thousands.

Since 1976, Argentine economic policies have lurched from catastrophe to catastrophe. The military junta borrowed enormously with no serious thought about consequences, and the structures of Argentine society made it impossible to tell how funds were being invested. Foreign debt exploded, the deficit boomed, and inflation approached 100 percent a year. Economic meltdown had disastrous political consequences. By 1982, like many other dictatorships through history, the Argentine junta tried to solve its domestic problems by turning to foreign military adventures. And like other regimes, they found that their control over military affairs was about as weak as their command of the economy. Military defeat in the Falkland Islands destroyed the junta. By 1983, a civilian president was in power once more. But nothing could stop the nosedive. Inflation reached 672 percent by 1985 and 3,080 percent by 1989. The disaster provoked capital flight and the collapse of investor confidence, not to mention the annihilation of middle-class savings. In the words on one observer, José Ignacio García Hamilton, the nation became “an international beggar with the highest per capita debt in the world.”

Another civilian president, Carlos Menem, took office in 1989, and despite his Peronist loyalties he initially tried to restore sanity through a program of privatization and deregulation. But events soon proved that Menem was only following a familiar pattern whereby a new regime would speak the language of reform and moderation for a couple of years before facing a showdown with the underlying realities of Argentine society. Menem could not overcome the overwhelming inertia within the country, the juggernaut pressures toward the growth of the state, to bureaucratization and regulation, and the destruction of private initiative and free enterprise. Between 1991 and 1999, Argentine public debt burgeoned from 34 percent of GDP to 52 percent. During the same decade, government public debt more than doubled as a percentage of GDP. These burdens stifled private investment so that productive sectors of the economy languished.

Economic disaster led inevitably to a collapse of social confidence and the evaporation of loyalty to the state. The more heavily the country was taxed and regulated, the more Argentines took their transactions off the books, creating a black economy on par with that of the old Soviet Union. In terms of paying their taxes, Argentines are about as faithful as the Italians to whom most have blood ties. Tax evasion became a national sport, second only to soccer in the Argentine consciousness, and provided another stumbling block to fiscal integrity. The collapse of respect for authority also extended to the law: courts are presumed to operate according to bribes and political pressure.

Systematic corruption has had horrifying implications for national security. After all, once you establish the idea that the state is for sale, there is no reason not to offer its services to foreign buyers. One spectacular example of such outsourcing occurred in 1994, when Islamist terrorists blew up a Jewish community center in Buenos Aires, killing 85. The investigation of the massacre was thoroughly bungled, reportedly because the Iranian government paid Menem $10 million. It is trivial to list the many other allegations of corruption and embezzlement surrounding Menem: what else is politics for, if not to enrich yourself and your clients?

In 2001-02, Argentine fortunes reached depths hitherto unplumbed. A debt-fueled crisis provoked a run on the currency, leading the government to freeze virtually all private bank accounts for 12 months. At the end of 2001, the country defaulted on its foreign debt of $142 billion, the largest such failure in history. With the economy in ruins, almost 60 percent of Argentines were living below the poverty line. Street violence became so intense that the president was forced to flee his palace by helicopter.

Since 2002, yet another new government has presided over an illusory economic boom before being manhandled by the ugly ghosts of Juan and Evita. Those specters were on hand to whisper their excellent advice to a new generation: if you face a crisis caused by excessive government spending, borrowing, and regulation, what else do you do except push even harder to spend, borrow, and regulate? Over the past two years, new taxes and price freezes have again crippled the economy, bringing power blackouts and forced cuts in production. Public debt stands at 56 percent of GDP, and inflation runs 20 percent. Last October, the government seized $29 billion in private pension funds, hammering the final nail in the coffin of the old middle classes. Judging by credit default swap spreads on government debt, the smart money is now betting heavily on another official default before mid-year. The Argentine economy may not actually be dead yet, but it has plenty of ill-wishers trying hard to finish it off.

We all know that deficits drive inflation, which can destroy a society. Less obvious is the political dimension of such a national suicide. Debts and deficits must be understood in the context of the populism that commonly entices governments to abandon economic restraint. No less political are the probable consequences of such a course: authoritarianism, public violence, and militarism.

The road to economic hell is paved with excellent intentions—a desire to save troubled industries, relieve poverty, and bolster communities that support the present government. But the higher the spending and the deeper the deficits, the worse the effects on productive enterprise and the heavier the penalty placed on thrift and enterprise. As matters deteriorate, governments have a natural tendency to divert blame onto some unpopular group, which comes to be labeled in terms of class, income, or race. With society so polarized, the party in power can dismiss any criticism as the selfish whining of the privileged and concentrate on the serious business of diverting state resources to its own followers.

Quite rapidly, “progressive” economic reforms subvert and then destroy savings and property, eliminating any effective opposition to the regime. Soon, too—if the Perón precedent is anything to go by—the regime organizes its long march through the organs of power, conquering the courts, the bureaucracy, the schools, and the media. Hyper-deficits bring hyperinflation, and only for the briefest moment can they coexist with any kind of democratic order.

Could it happen here? The U.S. certainly has very different political traditions from Argentina and more barriers to a populist-driven rape of the economy. On the other hand, events in some regions would make Juan Perón smile wistfully. California runs on particularly high taxes, uncontrollable deficits, and overregulation with a vastly swollen bureaucracy while the hegemonic power of organized labor prevents any reform. Thankfully, the state has no power to devalue its currency, still less to freeze bank accounts or seize pension funds, and businesses can still relocate elsewhere. But in its social values and progressive assumptions, California is close to the Democratic mainstream, which now intends to impose its ideas on the nation as a whole. And at over 60 percent of GDP, U.S. public debt is already higher than Argentina’s.

When honest money perishes, the society goes with it. We can’t say we weren’t warned. __________________________________________

Philip Jenkins is the author of The Lost History of Christianity: The Thousand-Year Golden Age of the Church in the Middle East, Africa, and Asia—and How It Died.

16 comments:

Anonymous
said...

that is some depressing crap. i live in califorina and know several people who have lost jobs or work for the county and state and are taking 10% paycuts. WTF is up with our congress and leaders?? most americans just want to live their lives, pay their bills, save alittle, why are screwing up our once great country???

There are more than a few people very concerned about this situation. The president and Congress...they just don't seem to care about the repercussions this "stimulus" bill will have. I am hoping that Obama will be a one-term president; he did not win by so many votes (about 3 million) that a second term is assured.

I really enjoy your blog and read your posts regularly. I do believe you have many observations and suggestions that people in America and other declining powers can learn from.

HOWEVER, I disagree with your post. Your reasons for the failure of the Argentinian economy sound like Friedman inspired neoliberalism (which believe that all economic ills can be cured through privatization, deregulation, shrinking of public expenditures/welfare). In fact, your country, many countries that adopted neoliberalism (like Chile under Pinochet, Indonesia under Suharto, Korea during the 1997 Asian currency crisis) have suffered tremendously. Two of the aforementioned countries suffered government-sanctioned disappearances and tortures in the name of neoliberalism.

Another name of neoliberalism is corporatism. One evil manifestation of this is disaster capitalism. I highly recommend Naomi Klein's "The Shock Doctrine." If you want a copy, I will send you one.

Sure Astraea, go ahead, share it with anyone you want. I dont know a thing about facebook ( except that some people got robbed here after criminals profiled them from the personal information posted there) FerFAL

Comparisons between the USA and Argentina are really kind of a crappy argument.

The USA is still where all the rich people in the world go to stash their cash.

The idea of 'capital flight' happening as a result of inflation doesn't seem like a credible risk, either.

At any rate, the far bigger worry than inflation and deficits is deflation. If you don't know what a deflationary spiral is, google for it. It's a cycle that's a lot harder to break out of than inflation.

Given that US GDP shrank by 5% or so in the 4th quarter of 2008, I think a lot of people would _welcome_ inflation right now.

First let me say that I'm not one of the people who think that Obama's going to fix everything that's wrong with the country or something, but I'd just like to point out that there's something a bit disingenuous about people making such shrill attacks on Obama's attempt to keep the economy from going into a depression.

Were people like Jenkins writing about the horrors of debt and deficits when Bush turned the surplus his predecessor left him into a trillion-dollar deficit with tax cuts for people making >500K/year and military adventurism? If he was, it's not showing up on google, anyway.

Interesting article. Very descriptive and very telling article of a country on a corporatist trajectory.

One thing that I found particularly telling of the United States that was previewed in the case of Argentina, was the marginalization of the entrepreneur class. Charles Hugh Smith has been writing a number of articles recently regarding the bureaucratic noose around most small business in the united states.

http://www.oftwominds.com/blogjan09/regulation-more01-09.html

http://www.oftwominds.com/blogdec08/taxes12-08.html

This is the first of a series of articles that appeared in December as "The End of Work"

http://www.oftwominds.com/blogdec08/rise-of-informal12-08.html

This was part 3, "Rise of informal business", it was very poignant and educational for any would be entrepreneurs.http://www.oftwominds.com/blogdec08/informal12-08.html

You have plenty of good stuff here, but posting an article from the American Conservative is a disservice to you and your readers. It is American Conservatives who have led America to where we are now.

Reagan, Bush 1 and Bush 2 have led us to this current sorry state of affairs. I can't blame Obama for what he's attempting to do, although I don't see it succeeding. Gee, he's been in office less than a month, and the current crisis that's been decades in the making is his doing?

And remember, Dick Cheney had the same beliefs about not letting a crisis go to waste.

I'm a bit late to the party on this thread, but I must comment here on PKS's response. One of his statements is commonly reported throughout the media and is flat out WRONG.

George W. Bush DID NOT inherit a surplus and churn out trillions of dollars in debt. Yes, W spent money like a drunken sailor and added trillions to the national debt. BUT, contrary to popular belief, there was NOT a surplus when he took office. Clinton operated at a deficit during each fiscal year (FY) in the first half of his presidency. He managed to eke out a small surplus for the last few FISCAL YEARS. He did not erase the deficits he created during the beginning of his presidency, nor did he eliminate the deficit he inherited. Now, I am not demeaning the fact that he ran a few years with a surplus, no small feat, but when he left office we still had trillions in national debt. People try to make it sound like theer was no debt when he left and now we owe 10 trillion dollars. It's just incorrect and people need to get that info out there!

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